Axactor ASA (ACR) Earnings Call Transcript & Summary

Hello, and welcome to the Axactor presentation of Q4 2024 Results. My name is Alex. I'll be coordinating the call today. [Operator Instructions] I'll now hand over to your host, Johnny Tsolis, CEO, to begin. Please go ahead.

Good morning, and welcome to Axactor's fourth quarter presentation. Together with me, I have our CFO, Nina Mortensen. This presentation will be divided into 4 parts. First, I will take you through the Q4 highlights. Then Nina will present the financial update, before I give an updated outlook. Finally, we'll round off with a Q&A session. Let us move to Slide 3 and have a look at the highlights for the quarter. Gross revenue increased substantially year-over-year compared to Q4 2023, up from EUR 85 million to EUR 161 million in '24. This large increase is explained by the previously announced portfolio sale that was conducted in Q4. More about that later. Adjusting for this transaction, the revenue declined 4% year-over-year. However, it is worth noticing that the 3PC revenue increased by 10% year-over-year on a like-for-like basis. Cash EBITDA ended at EUR 130 million, up from EUR 55 million the previous year. Again, the main explanation is the portfolio sale. Adjusted for this, the cash EBITDA declined 6%. As most of you remember, we announced already in November that primarily due to the challenging macro environment we saw during the whole of 2024, we will have to do a substantial negative revaluation in Q4. The final number ended at EUR 104 million. Please note that this negative revaluation does not have any cash impact, but will obviously impact financial metrics. Also, the revalued claims remain valid and we will continue to accrue interest where applicable. Given this negative revaluation, the return on equity to shareholders ended at negative 19% for 2024. Excluding the revaluation, the return on equity was 6% for the year. Axactor still has a solid balance sheet with an equity ratio of 26% after the revaluation. In addition, we have more than EUR 100 million in available liquidity. So even though the revaluation is, of course, unfortunate, we still have a very strong financial position. Let us move to Slide 4 for more details on the revaluation. Although it's never desired to do a negative portfolio revaluation, sometimes it can be necessary. The size of the revaluation corresponds to 9% of Q3 book value after the Spanish portfolio sale and amortization. Since the reason for the revaluation primarily can be explained by the long-lasting soft macroeconomic environment, it is natural that all Axactor markets are affected by it. However, the largest adjustments are done in Sweden and Germany. As you can see from the graph, our NPL book values are down 14% end Q4 compared to end Q3 with the 2 main explanations, the Spanish portfolio sale and the revaluation. However, on the positive side, the revaluation will effectively lower our estimated collection curves, which will, in turn, make sure to improve our collection performance. The adjustment will make sure that the book values are correct and the improved collection performance will give us very comfortable headroom towards the collection performance covenant on the RCF. As I mentioned in the introduction, despite the revaluation, our balance sheet stands out as very strong. Let's move on to the next slide for more details. I can understand that it can be a bit challenging to evaluate individual company risk for investors in the sector, especially when you're reading about peers in Chapter 11 processes and other types of restructurings. However, I think in order to understand the differences between the companies, it is necessary to dive a bit into the details as the companies are very different in terms of business models, geographical risk, funding structures, et cetera. A good place to start would be to have a look at the balance sheet. If you do that, you will see that Axactor has a very tangible asset side, probably the most tangible in the industry, where only 5% of the balance sheet is goodwill. Further, close to 90% of the balance sheet is either portfolios, repossessed assets or cash. Even though a revaluation like the one we announced today has reduced the book value of the NPL portfolios, Axactor still have a rock solid equity ratio of 26%. In addition, we have more than EUR 100 million in liquidity that could be used for either bond buybacks or portfolio investments. As you can understand, Axactor is in a good position to handle all the coming debt maturities and prolongment of the RCF. We will talk more about that later. But first, a quick reminder about the Q4 portfolio sales on the next page. A part of our deleveraging strategy was demonstrated through the very important portfolio sales we announced in Q4. We sold off the earliest Spanish vintages, representing close to 6% of our total NPL book value, and the transaction generated approximately EUR 80 million in cash. The price was 102% of book value, and it was a true sale to our competitor, Hence, no continued servicing or servicing fee that impacted the sales price. We believe this transaction visualizes Axactor's valuable and liquid balance sheet. It also shows that we are both willing and able to use the secondary market that has become much more active over the last 2 years in the Axactor countries. The transaction has several positive effects. Obviously, it gave an immediate improvement on our financial covenants, which was important, especially on ICR and leverage ratio, but it was also important as part of renewing our Spanish NPL book, opening up the opportunity to buy more fresh debt where we can create additional value by using our platform structure to a larger extent than an old back book. The transaction gave us improved financial flexibility, as you can see on the next slide. This flexibility, we already took advantage of in Q4, as the liquidity gave us the opportunity to start refinancing of our ACR03 bond that matures in September 2026. During Q4, Axactor acquired bonds in the market for approximately EUR 51 million at 94.2% of par. Hence, we achieved a gross gain of close to EUR 3 million due to these buybacks. Axactor now holds approximately EUR 70 million of ACR03. We believe this demonstrates approximately EUR 70 million of value-creating transactions such as further accretive bond repurchases and portfolio divestitures. Moving on to the next page for an overview of our current debt structure. It is, for the most part, self-explanatory, but I would nevertheless give a few pointers. The RCF draw by year-end was EUR 472 million, leaving EUR 73 million in headroom for max draw. The first maturity is in 1.5 years, and it is the RCF expiring in June 2026. Total remaining bond debt is now EUR 425 million. Finally, the total outstanding interest-bearing debt by year-end was a little shy of EUR 900 million. Before I give the word to Nina, I would like to just give a few comments on how we are thinking around the upcoming maturities. First up is our RCF. We aim to prolong or renew this during the first half of this year. We will continue to invest in attractive portfolios, but at the same time, have a close eye on the leverage ratio. Given natural seasonality, first half will show a moderate investment level. Depending on how the bond market develops in general and how the spread specifically for Axactor develops, we expect to refinance ACR03 during 2025. As we have expressed earlier, we will aim for a more diversified maturity profile with smaller bonds primarily with annual maturities compared to the current structure where we have some years without any maturities and some with relatively high maturities. This will reduce the point timing risk, which we think is an advantage for both us and the bond investors. As part of the refinancing strategy, we could potentially consider further portfolio sales during 2025. However, there are no ongoing processes at the moment. Nina, with that, I'll leave the word to you.

Thank you, Johnny. So now I'll take you through the Q4 financial performance, starting with the overall figures and then a bit more context on what is behind the numbers. Gross revenue for the group almost doubled from EUR 85 million in the fourth quarter of 2023 to EUR 161 million in the fourth quarter 2024. The high increase in gross revenue stems from the sale of Spanish portfolios for an average premium of 2% over book value. Excluding the sales proceeds, gross revenue was EUR 82 million, equal to a decline of 4%. The NPL segment reported a gross revenue of EUR 144 million. The segment gross revenue, excluding the sales proceeds, was EUR 66 million, a decline of 6% compared to Q4 2023. The 3PC segment delivered revenues of EUR 16 million, up 5% from fourth quarter last year. Let's look a bit more into details on each of the business segments, starting with NPL on the next slide. NPL segment delivered a negative total revenue of EUR 59 million for the quarter. The negative total revenue is mainly caused by net negative NPL revaluation on revised ERC curves of EUR 104 million. The revaluations came mainly as a result of continued challenging collection environment across all Axactor countries. In the fourth quarter, the overall collection performance ended at 94%, up from 90% in the third quarter. When we sold the Spanish portfolios, we amortized the remaining book value. Thus, the effective amortization rate for the quarter was significantly higher. The effective amortization rate ended at 68% for the quarter, up from 29% in the fourth quarter last year. On the more positive side, we continue to have success with the ongoing cost improvement projects. Total operating expenses for the NPL segment fell 9% to EUR 11 million in the fourth quarter. Please turn to the next slide for comments on the development on the 3PC segment. The 3PC revenues ended at EUR 16 million for the quarter, equal to a growth of 10% if we exclude Sweden and Finland, which were closed down last year. The increase was driven by double-digit growth in Norway, Germany and Italy, as well as a strong development in Spain. The Norwegian 3PC business is performing particularly well with solid growth from new sales within the Banking and Finance segment, a key focus area of Axactor's strategy. The contribution margin is slightly lower this quarter compared to the previous year due to one-off revenue items following the aforementioned 3PC business closures. This led to a decline in contribution margin from 46% to 44% in the fourth quarter of 2024. The underlying operational profitability is in a positive trend with the full year margin increasing to 38% from 36% in 2023 without adjusting for the positive one-off items. Let us move on to the next slide where I'll present more details on the reported financials. If you look at the 2 charts to the left, you clearly see the impact of the revaluations on the total revenue and the EBITDA for the quarter. Total revenue at group level ended at negative EUR 43 million, while the EBITDA was minus EUR 74 million. Cash EBITDA ended at EUR 130 million for the fourth quarter, up from EUR 55 million in the corresponding quarter last year. The increase was mainly driven by the proceeds from the Spanish portfolio sales. Now on to the next slide for a look at the development in return on equity. With the adverse impact from the NPL revaluations in the fourth quarter, the return on equity for the full year 2024 ended at minus 20% on a fully consolidated basis and at minus 19% for ROE to the shareholders. Despite the negative result for the year, Axactor still have a robust financial position with an equity ratio of 26% and a comfortable liquidity position with approximately EUR 100 million available in cash and headroom on the RCF. Moving on to the next slide for some comments on the status of the financial targets. Early last year, we communicated our 4 financial targets for 2026. Firstly, the annual NPL investments for the period 2024 to 2026 should be in the range of EUR 100 million to EUR 200 million. In 2024, Axactor invested EUR 128 million, well within the target range. Secondly, the annual dividend payment should be within 20% to 50% of reported net profit. As net profit for 2024 was negative, dividend payments are not applicable for 2024. Next is a target of reaching 12% ROE in 2026. And despite the 2024 result, we stay committed to this target. Finally, it is Axactor's ambition to be at or below 3.5x on leverage by the end of 2026. The leverage ratio at the end of 2024 was below target at 2.7x. I'll now hand it back to Johnny for some comments on the outlook.

Thank you so much, Nina. Regarding collections, we expect higher collection performance after the negative revaluation in Q4. On OpEx, we continue to have very good cost control and aim to absorb any cost inflation and to keep OpEx flat. Cost of funding will continue to go down due to lower IBOR rates and bond buybacks. Leverage is substantially reduced. On the investment side, we expect to do high-quality investments. However, we believe that this year, investments will be in the low end of the financial target of EUR 100 million to EUR 200 million on an annual basis. Our pan-European position continues to give us valuable access to attractive NPL markets in Europe. Finally, we expect the 3PC business area to continue to deliver solid growth at healthy margins. With that, we open up for questions.

[Operator Instructions] At this time, we currently have no registered questions. So I'll hand back to Johnny Tsolis.

Yes. Thank you. So we have a few questions on the chat here. So I'll start off with the first one. What was the ordinary operating collection for Q4? The number is EUR 65.6 million. And you can find that on Page 7 of the report under the revenue under the financial chapter. Second question, what was the nonrecurring expenses in the operating expenses in Q4? And we don't disclose that number, but it's a relatively moderate one. And a follow-up on this was it connected to the portfolio sales? And yes, the vast majority was in connection with the portfolio sales, more specifically advisory costs most of it. And then we have a second question here. Could you please give some flavor on the significant shortfall in interest income in Germany before credit loss? And here, I assume that per definition it's not possible to shortfall on interest income. But I guess it's the shortfall on collection against forecast. And the flavor, so to speak, is that this is due to the financial situation in Germany primarily. I believe the country is still in recession. But also here, it's worth to add that during 2024, we did substantial cost cut initiatives in Germany that did create some operational issues that we have been handling during the fall, and the situation is now under good control. And also the question about how will this going forward? Well, we have also adjusted curves in Germany, and we now expect, in Germany, as for the rest of the countries, to be at 100% collection performance, plus/minus going forward. Is there any risk of covenant breaches now? And the short answer to that is no. How did you sell -- who did you sell the NPL portfolio to? That is not disclosed, so that will not be disclosed. But I've said earlier that it is a competitor. So it is a true sale. But I cannot disclose which one. Could you share the EBITDA generated by the portfolio sold in Q4? No. We don't share that information. Do you have any guidance of potential revaluations for 2025? No. We don't -- where do you trend in January on collections? We don't guide during quarter. So you have to wait until the first quarter report to get information on collections for January. Second question. Do you know if the RCF lenders wish to be paid down for being extended? The question (sic) [ answer ] is no. So no, they don't want to be paid down as far as I know. Can you tell us a little about the outlook for collections in Q1 2025? We don't give more guiding that we already do in the report. We have adjusted the curves, and we are putting in the estimated ERC in the report. So you can find it there. Next question, is there a possibility to increase size of RCF when you extend it? Well, in the documentation today, there is a possibility to extend the RCF by including more banks. So it's an option, but that's not something that we are working on currently. So we expect -- regarding the RCF, we expect to just prolong it more or less exactly as it is today since we have this option that, of course, requires a credit committee approval, but it will be on the same documentation and the same margin levels and so on. Question is, will you do more bond buybacks? Yes, that we have said that in the presentation. Like I said, we have more than EUR 100 million available for liquidity. It could be used both to bond buybacks or to buy portfolios. Yes, that was all the questions that we have received. I don't know if the operator has received any incoming calls.

Currently, no registered questions. Apologies, we do have one. We have a question from Lars Dueser from Deutsche Bank.

First of all, if I look at your Q4 net debt, that benefits from the asset sale proceeds. And the cash EBITDA at the same time benefits from the asset sale proceeds, right? Because you are capturing them. It's flowing through the collection numbers. So okay, fair enough. I can strip out the round about EUR 80 million of asset sale proceeds from the reported cash EBITDA. But then what is the pro forma adjustment for the asset sale itself, given that you now will look at quite a bit less collections from the sale? Do you disclose that? First of all, if I look at your Q4 net debt, that benefits from the asset sale proceeds. And the cash EBITDA at the same time benefits from the asset sale proceeds, right? Because you are capturing them. It's flowing through the collection numbers. So okay, fair enough. I can strip out these around about EUR 80 million of asset sale proceeds from the reported cash EBITDA. But then what is the pro forma adjustment for the asset sale itself, given that you now will look at quite a bit less collections from the sale? Do you disclose that?

No, unfortunately not.

Right, right. And then if I look -- for modeling purposes, if I look at ERC, I see that year 1 ERC now in Q4 is down to EUR 258 million, which is roughly EUR 70 million lower quarter-over-quarter. How do you guys try to offset that operating deleveraging this year? Will you step up the purchases? I mean, you guide for a very wide range, right, EUR 100 million to EUR 200 million. That would be the next question basically.

Regarding the investment level, we have said that we will be in between EUR 100 million to EUR 200 million. And then I also said during the presentation that this year, we will most likely end up in the lower range of the interval. And that is because of several of our priorities, deleveraging is one of them. So we have said that until we have a little bit better control of the ACR03 maturity that matures in September '26, we will be a little bit careful with investing. But we don't know exactly, of course, where we will land. My personal opinion is that I think that we will be able to refinance the bond. And we have said that we will do it during this year, so most likely just before or just after the summer. And I think we will be able to refinance it at attractive margins and that we will roll part of it. And that will open up the possibilities to also invest quite substantially more than our replacement CapEx for 2025.

Right. So on my numbers, right, I mean, you don't disclose GMM, but I think you guide investors to around 2x, which is also probably what is implied by the book value at the moment. If you work with that assumption, what do you need to invest to keep your ERC steady year-over-year, right? I mean when I think about the ERC bridge, I have the beginning of the period, I then have collections, which drive it down, which is obviously the back book, but also any sort of front book. And then I have acquisitions or portfolio purchases against that multiplied by the GMM, basically ERC acquired. And maybe you can help me there, but like I get to a level of pretty much the midpoint of your range, like you need to invest EUR 150 million or so to keep ERC steady. And hence, if you tell us you are now going to the lower end of the range this year, you basically suggest you want to run off this ERC for a bit and the book value for a bit, just to be conservative. Is that correct?

To be honest, I haven't been thinking so much in the details. This is a very detailed question. I suggest that you take it offline, so we could really understand exactly the question and have some time to think about. I don't have a clear answer to you on the phone now, unfortunately, sorry.

Right, right. And then the next question, obviously, this book write-down, right, was quite large, 10%, give or take. I guess investors want to know now how confident are you in the marks going forward? Like do you really categorically rule out further write-downs at this stage? Will we see performance at 100% throughout the year? Obviously, I appreciate this depends also on macro factors. But like if macro remains as it is, is that your expectation?

Our expectation is to reach, like I said, plus/minus 100% collection performance for 2025. That is what we have aimed for. Can I guarantee you that there will not be any write-downs or revaluations positive or negative? Of course, not. Of course, not. That's impossible. No one can in the industry. But we believe that we have now done -- like you said, we have done a substantial revaluation, and we believe that it should be sufficient to reach the curves going forward.

Got it. Got it. And then maybe last but not least, right? I mean, it's obviously the challenge the entire industry is facing, and you mentioned that 2 peers have already gone through A&Es because of that, I guess. If I look at your return of invested capital, and I compare it to where the bonds are trading at the moment or, in general, where such players in that sector can refinance, it looks like that your cost of capital or your cost of funding will be above your return of invested capital, right? Like what makes you confident that you can start again generating excess returns? And what makes you confident that you can refinance at attractive margin based on what we are seeing at the moment, basically, right? Like do you think like we need a rights issue for this? Do you think we need sponsor support? How can you basically get that right that you can create value again going forward? Because clearly, being in runoff is not something I think John will be fond of. And clearly, shareholders want to see some sort of value creation and growth going forward again, right?

Well, that question has a lot of elements to it. So first of all, we do more than just NPL. So if you look at our 3PC business, it grows substantially. And we have strong beliefs that it will continue to grow close to double digits in 2025 at attractive margins. So that will certainly help. The rights issue, you could just forget about. There is no need for any rights issue. We will have the opportunity to borrow in the market. And if you compare to -- what you don't sit on of information that we have is that we see the returns on the different vintages. And what I can say is that the last vintages for '21 to '24 have substantially better return than the vintages from 2016 to 2021. So we know that the new vintages or what we invest in has much better returns than the average for Axactor. And that is why you also can see, if you look at the gross IRR -- average gross IRR for the company, we haven't disclosed it, I don't know if we have it in this presentation, but we are disclosing it more or less on a quarterly basis. You will see that the gross IRR on the back book has gone from around 15% and now I think we have reached 19%. And this will continue to go up just as we continue to blend the book. So I'm confident that we will be able to invest in very attractive deals also going forward. Our challenge has been the back book, and we are cleaning up a lot of it with this revaluation. And on top of this, we are still, I would say, industry-leading in reducing the cost level. So this industry is about a lot of things. And funding cost is one thing, but it's also about operational excellence and keeping the cost level down, where I think we are industry leading. And it's about doing the right valuations and having the access to the most attractive deals, where I think we are in a really good position. If you compare our gross IRRs to the industry, I think you will see that we have access to very attractive deals in markets, especially like Spain and Norway, where we actually invest the vast majority of our CapEx.

Right, right. Look, I just think if this is really now about the front book and the opportunities you speak about there and capturing these returns, the biggest bang on the buck, I guess, you would really get if you would get the cap structure in a better shape, right? And once of a sudden, you have a much lower bar, a much lower cost of capital probably as well. And hence, you're much better prepared to create shareholder value again because, quite frankly, shareholders have gone through a really tough time in the last few years. And if there is no dramatic change on the capital structure, we are basically left in limbo, right? And we really have to hope that the market comes back. And I understand, obviously, that you say the servicing business is growing. But then at the same time, we all know it's a very, very small business for you guys, right? It's not like Intrum where you have 50% or so of cash EBITDA coming from servicing. I mean, you guys generate EUR 55 million 3PC revenue or so, right? And we know it's a low-margin business, right? So I don't know if servicing here is really the needle for you as a business to really get back to shareholder value creation. It can help a bit, but clearly, it's all about the investing business. And for that, I feel like the capital structure maybe could look a bit better to make sure John can make returns again down the line, yes?

Yes. No, that's -- I didn't catch the question there. But yes, I agree. We are working on the capital structure. I think there's still potential to improve. One thing that we do is that we try to split up the maturity profile on the bonds, so we could be in a position to -- and I think that will help take down the point risk. I think it will also give us better margins. You also have to remember that more than 50% of our capital structure is the RCF, which we have really attractive margins on, I think. And so the mix is not that bad. But of course, I think what will really improve our spreads on the bonds when we need to refinance is that we need to get back to 100% collection performance, which we are now taking the right steps to do. We need to continue to fight on cost. I agree that 3PC is smaller than Intrum, but it still is close to 25% of our business. And I hear that you say that it's a low-margin business. It's not a low-margin business in Axactor. For the market, maybe yes, but also for the market, the margins are growing. We see that the banks are more and more willing to pay for our services as an industry and for Axactor in particular, I think. So I'm quite positive on the prospects of the 3PC. We see also increased volumes. So I think, yes, it could help quite a bit, I think. But yes, you are right. We are not happy with the shareholder return at all. And I wouldn't say not just the last 2 years, I would say the last 5 years or even more so. So we are fighting every day to improve the situation.

Yes. Thank you very much. It was very helpful.

We have gotten a few more questions here. And we have one on RCF margins. We don't disclose it directly, but I think what we have said earlier is that it's more than competitive. It's competitive. Yes, I don't think I could give any more flavor to that. What about dividends in 2025? I think it's quite obvious that there will not be any dividends in 2025 based on 2024 financials. And that is according also to our policies. Okay. Yes. And then the last question, is it true that the portfolio you sold is the worst vintage? What I can say about the portfolio is that it's the earliest vintage. So half of it is 2016 vintage and then it's approximately 20%, 25% on '17 and '18 vintages. It's the first portfolios that we acquired in Spain that was booked in 2 separate companies. So it's not a cherry-picking deal. It's kind of the first portfolios that we bought. And yes, we sold above the book value. How do you manage to be industry leader in collection cost in a competitive market like Spain? And how do you see the long-standing local players to react? So if you go back to the very beginning, we did an acquisition in 2015 in Spain, which was definitely the best player in the industry on legal collection. So that was the starting point, because in Spain, the legal collection is extremely important. And this was a relatively young company started by 2 founders, 2 young lawyers that had spent 5 years to build up a structure, very cost efficient, but also very effective in legal collection. So that was the starting point. And then we did not buy any other large companies to add on. So what we did is that we built it from scratch. So we started off by hiring greenfield and set up a low-cost collection center outside Madrid in a city called Valladolid. And then we have been really good at just holding back on cost. And then as in Spain, as in all other countries, we very quickly went through the system side and went for standardization. All the systems are off-the-shelf systems. There's no self-developed systems and so on. So we have been really careful about not building too much structure. And by what I also now told, there is no legacy structure, so to speak, in Spain. So that has been how we have been able to build this position in Spain. And the other local players, to be honest, there's not so many local players in Spain. It's more -- when we compete, we compete mostly against other international players or against investment companies from the U.K. normally. When do you expect dividends? So we don't -- we're not going to guide on any dividends, but we have the policy that says that we will pay 20% to 50% of the result of the previous year. So I assume if we deliver a solid year in 2025, it's up to the Board to evaluate if they will pay dividends or not in '26 based on the '25. But it always depends on several factors, but the policy is available for everyone to read. That was the last question we had. So with that, I would say thank you all for calling in, and have a great day. Bye-bye.

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